China Busts US$5.7 billion Cryptocurrency Fraud

Beijing dares swindles in promoting blockchain currencies

By: Toh Han Shih

For Chinese leaders, cryptocurrency has become a double-edged sword. The Chinese government is promoting its own digital currency while being forced to crack down on cryptocurrency fraud that this week produced arrests in one of the world’s biggest bitcoin scams.

In April, Beijing announced its plans for a sovereign cryptocurrency, the Digital Currency Electronic Payment (DCEP), which can be used for payment as well as banking withdrawals and deposits. DCEP, which is currently on trial, provides an alternative to the US dollar and in the long term is designed to challenge the greenback’s global dominance.

The sovereign cryptocurrency is aimed at increasing the international reach of the Chinese currency and payment systems, aiding the Chinese government’s globalization ambitions through its Belt and Road Initiative.

But on June 30, the Chinese Ministry of Public Security website announced what was called one of the largest scams in the global cryptocurrency sector, having “completely destroyed” a cross-border cryptocurrency trading platform named PlusToken involving over RMB40 billion (US$5.7 billion). PlusToken is suspected of being implicated in the bursting of the bubble of Bitcoin, the world’s largest cryptocurrency.

Chinese police worked with local authorities in several countries including Vanuatu, Vietnam, Cambodia and Malaysia to arrest 27 main suspects in June, the Public Security Ministry said, on top of another 82 nabbed in March.

In May 2018, a Chinese suspect surnamed Chen created a PlusToken platform to trade cryptocurrency illegally, the ministry disclosed. Under the guise of offering cryptocurrency value-added services, the platform offered high returns to attract a large number of clients who paid an entrance fee of US$500 each. The PlusToken platform gained more than two million customers in China and other countries, involving over 40 billion yuan, the ministry said. Most of the money was used by members as rewards to entice new members, while the rest was used by Chen and others for their personal extravagance, the ministry added.

“To attract more participants, this criminal syndicate used the Internet to brazenly promote the platform …..hired foreigners pretending to be founders of fake international platforms … marketed the platform through activities like meetings, concerts and vacations, and thought nothing of splurging lots of money on big overseas promotion events with thousands of people,” the ministry revealed.

PlusToken leaders introduced a blond Russian man known only as Leo as chief executive and attempted to market him as a celebrity, reported the Wall Street Journal on February 8. A group that called itself the PlusToken Alliance posted a photo on its Facebook page that appeared to show Leo at a charity reception with Prince Charles in London in 2019, the US newspaper reported.

“But in the case of one notable 2019 scam, the consequences may go beyond the direct victims. We believe that the criminals behind the PlusToken Ponzi scheme could be driving down the price of Bitcoin when they liquidate their stolen funds via OTC (over the counter) brokers,” said the Chainalysis 2020 Crypto Crime Report.

PlusToken was a Ponzi scheme, according to Chainalysis, a US firm that designs software that can analyze cryptocurrency data and help track illicit transactions. Chainalysis’ clients include the Federal Bureau of Investigation and the US Drug Enforcement Administration.

From its research and modeling, Chainalysis concluded that cashouts from PlusToken correlated with drops in the price of Bitcoin. The price of Bitcoin skyrocketed from US$121.34 on October 5, 2013 to US$18,984.77 on December 19, 2017 then crashed to US$3,562.92 on January 25, 2019. Bitcoin was trading at US$11,030.37 on July 30.

The bursting of the Bitcoin bubble inflicted a paper loss of US$44 billion on Chris Larsen, a US tycoon engaged in the payment sector, in January 2018.

“The PlusToken scam is a powerful example of how cryptocurrency scams harm the public, and should alarm exchanges, law enforcement, and regulators alike,” said Chainalysis.

Allowing OTC brokers to operate without scrutiny gives criminals a simple, obvious way to launder their ill-gotten funds, and exchanges should conduct know-your-client (KYC) checks and monitor such activity, Chainalysis urged.

Ponzi schemes and other forms of fraud involving cryptocurrencies lured at least US$4.3 billion from investors globally in 2019, more than the combined US$3 billion in 2017 and 2018, according to Chainalysis.

Toh Han Shih is a Singaporean writer in Hong Kong.

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